When Is Cheap Not Cheap?

Consumers can be of two minds—at the same time

Lowest prices of the year! Markdowns! Exclusive Dealer! Top Quality! We’ve all been exposed to them—the marketing strategies promising bargains or high value. Yet as alluring as those pitches can be, consumers draw very different—and sometimes contradictory— conclusions when it comes to sale prices or value. To make it even more challenging, consumers often fill in gaps in their knowledge by drawing inferences about products.

New research co-authored by Steve Posavac, the E. Bronson Ingram Professor in Marketing, finds that in some consumers’ minds, price denotes quality. Yet for others, low price leads a consumer to believe he or she is getting a good value.

Steve Posavac

“Consumers rarely have complete information and use various strategies to fill the gaps in their knowledge as they consider and choose products,” the researchers wrote in an article published in the April 2013 Journal of Consumer Research. “One of these strategies involves using naive theories: informal, common sense explanations that consumers use to make sense of their environment. For example, consumers may believe that popular products are high in quality while also believing that scarce products are high in quality.”

Posavac and collaborators Hélène Deval, Susan P. Mantel and Frank R. Kardes found that consumers use a series of theories when considering value and price. How they size up a possible purchase depends on what is on their mind when they’re thinking about a given product— something marketers need to take into account when crafting ads, marketing strategies and promotions.

Price vs. Quality Experiments

The researchers conducted eight experiments that tested marketing techniques that leaned toward price or quality. In one experiment, consumers were shown an ad for a bottle of wine with either a high or low price. When subtly reminded of quality, consumers evaluated the expensive wine more favorably than the cheap wine. However, when subtly reminded of value, they rated the cheap wine more favorably.

“In the case of price, most people simultaneously believe that low prices mean good value and that low prices mean low quality. But these two beliefs are not equally present in consumers’ minds all the time,” the authors wrote. In short, people can hold opposing beliefs about the same product.

When Product Marketing Backfires

Sales promotions succeed when consumers perceive that they are getting a good deal, but they can also backfire if consumers perceive that lower prices indicate poor quality. And if the company makes assumptions that one naive theory guides consumers, they run the risk that the strategy could actually cause a decrease in sales and perceived value. “For example, a marketer who feels that low prices signal value may go all in on a low-price strategy in an attempt to drive sales but may succeed only at reducing brand value and alienating consumers if a substantial percentage of the firm’s customers believe that low prices are commensurate with low quality,” they wrote.

Posavac and his fellow researchers cite retailer J.C. Penney as an example. The company moved to a new strategy of abandoning sales events in favor of everyday low pricing. However, J.C. Penney customers had been so conditioned to the naive theory that sales promotions signified good deals that the absence of such events was taken by many longterm customers to mean that there were no longer opportunities to get good deals—and sales dropped.

“[Companies] design a strategy by assuming that a certain naive theory is going to drive consumer evaluation and choice when, in fact, several naive theories are available to the consumer,” the authors conclude. So what’s the best strategy? The authors suggest that, in practice, marketing communications that set the stage by suggesting a given naive theory—quality, for example—and then make a product appeal in keeping with that theory will have the best results.